Alan Kohler is one of Australia’s most experienced business commentators. Alan has been a trusted source of investment advice to Australians for many years, and in 2005 he founded Eureka Report - Australia’s #1 online investment report. Along with Robert Gottliebsen and Stephen Bartholomeusz, Alan also founded Business Spectator, the popular business news and commentary website. Alan is the regular finance presenter on the ABC News and producer of the popular nightly graph (or two).

Light-headed over Buzzfeed’s fluffy formula

According to many experts, if you want a glimpse into the future of content and editorial on the web you should take a look at New York’s Buzzfeed.

The company has managed to generate its fair share of headlines over the past year, many proclaiming that it has cracked the code when it comes to publishing content on the internet.

At first impression, Buzzfeed looks like a collection of fun, harmless but relatively shallow content, from today's front page you can get up to date on '15 Animals Who Are Absolutely Terrified Right Now', '27 Bruce Jenner Quotes that make Keeping Up with the Kardashians Worth Watching' and '10 Awesome Vintage Style Aprons for your Inner Nerd'.

This sort of content plays well to the core of Buzzfeed, an 18-34 audience looking for quirky content, which mixes nostalgia, irony and humour that they can share across social networks. Effectively this is ‘content as badge’, content people share across Facebook and Twitter as a statement of their personality, sense of humour and to be seen as being in the know. It is also perfect time filler content – well suited to those bored at work, in transit or at home and looking to fill 10 minutes.

However, Buzzfeed wants to be more than that. It is looking to diversify its content mix beyond shareable lists into both short form news headlines and long form journalism. Back in March it announced it is launching a 'business and finance' vertical and overnight it announced it is partnering with CNN and YouTube to launch a new video offering.

The numbers behind Buzzfeed are big, including 60 million unique users a month, while individual article generating view counts of one million plus, 70 per cent of articles are ‘social’ and 50 per cent of the audience is aged 18-34. It has raised a staggering $46 million in venture funding as well, from some heavy hitters such as Hearst, Softbank and New Enterprise Associates.

One key number that isn’t discussed as liberally is that of revenue. Buzzfeed's revenues have not been disclosed but have been estimated to have been in the $10-$20 million range for 2012. Despite relatively low revenue relative to user numbers to date, some believe it can be a billion-dollar company. Even a few weeks ago that was somewhat hard to believe – peel back the hype and ‘next big thing’ status and Buzzfeed is essentially a content-led free media product with a sole reliance on advertising. While native advertising is an emerging area, little is known about its efficacy for advertisers and whether such a blur between what is advertising and what is content will be tolerated in the long term by readers. There are also legitimate questions around how much Buzzfeed relies on content created elsewhere to pad out its list-based traffic drivers.

Yet with Yahoo’s $1.1 billion acquisition of Tumblr, the idea Buzzfeed could generate a billion dollar exit is one that seems quite possible. Buzzfeed has the hockey stick growth so revered by investors and possible acquirers. It’s audience sweet spot is the 18-35 year old, an audience that has been said to have abandoned broadcast media (which is not entirely true) and is generally aggressively pursued by advertisers. Its revenue model is new and untested – generally a positive thing when it comes to valuation as future revenues are based on potential and not precedent – and so far the company's sales efforts have been laidback at best, which can create the attractive proposition that the property is well primed for a future revenue explosion with the backing of a solid business development structure. It has also heavily promoted its suite of mobile advertising products and also its analytics potential. Two ticks there. On top of that, the site is considered cool … and generally cool commands a premium.

Looking at the above there are significant similarities between the broad appeal of Buzzfeed to a potential acquirer and Tumblr. Tumblr, while more a platform than a content creator, in an audience sense mirrors Buzzfeed. Young, hard to reach and influential. It’s a compelling advertising sell if – and it’s a big if – it can yield results for advertisers.

Two years ago we saw a site with a similar amount of media and investor hype get acquired. It was The Huffington Post, acquired by AOL at the time for $315 million. Like Buzzfeed, The Huffington Post was highly reliant on content from external sources. Also like Buzzfeed, Huffington Post was highly aware of the value of PR; founder Arianna Huffington being paraded around as an example of the future of new media and evidence that consumers were weary of heritage news brands and desperately seeking a fresher alternative. Buzzfeed is singing from a similar song sheet, yet it also believes that the humble advertising banner is a redundant media and that the Buzzfeed model is the natural evolution of advertising on the web.

Buzzfeed and HuffPo also have a few other things in common – namely Buzzfeed co-founder Jonah Peretti, who also founded Huffington Post, and Buzzfeed chairman Ken Lerer who was also chairman and co-founder of Huffington Post. Chief revenue officer Andy Wiedlin was also at Huffington Post in a sales role. At the time Huffington Post was acquired by AOL it was reported to be generating $50 million in annual revenue, making its sale price a six times multiple on revenue. Since the acquisition in 2011, AOL’s media division – of which Huffington Post is the jewel in the crown – has lost $86.1 million. Any acquirer of an asset like Buzzfeed needs to be mindful of the difference between the projected potential of a relatively unproven content asset on paper, and the actual performance of said asset in the hustle and bustle of the modern advertising climate.

In regards to a Buzzfeed acquisition it’s really a matter of when, not if. It will result in a handsome pay day for the founders and investors and a second exit success story for Lerer and Peretti, most likely less than three years after their AOL pay day. A six times revenue multiple is highly unlikely, an acquirer would be required to pay an astronomical 20 times-plus multiple based on Buzzfeed’s current revenue progress and valuation ambitions. It will be interesting to see whether things work out better financially for the ultimate acquirer of Buzzfeed than they have for AOL and its The Huffington Post purchase so far.

Ben Shepherdis a media and technology consultant. He can be found onLinkedIn and onTwitter.